New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Real Estate Reflections</h2>
<p><strong>TINA Gets on the Property Ladder</strong></p>
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<p>The listed property vehicle (LPV) sector led the wider market in July, up +7.1% versus the S&amp;P/NZX 50G up +2.4%. Changes in interest rates have been a key driver of LPV performance over the last 10 years and with (1) LPV dividends reaffirmed over May/June, (2) economic conditions 'normalising' post lockdown, and (3) volatility in other yield sectors, we believe LPV yield remains relatively attractive. In this note we highlight what current yield spreads tell us about certain LPVs, and where we see value on a relative basis. Looking ahead, there are three LPVs reporting this month, which will provide us with a read on sector confidence and expectations. We continue to favour Investore (IPL) and Vital Healthcare Property (VHP) for their defensive attributes, and Stride (SPG) for the leverage in its asset management platform.</p>
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<h3>The story behind the yield spread</h3>
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<p>LPVs gross yield spread to bonds at a sector level has remained relatively stable over the last 10 years, averaging +410bp. However, on a stock by stock basis the story has been very different. Retail yield spreads have widened as structural headwinds set in (KPG's spread has increased +310bp to 6.6% since 2017) while industrial spreads have tightened as the sub-sector gained investor popularity (GMT's spread has broadly halved to 2.7%). Looking ahead, for sector spreads to compress further we believe we would need to see (1) a re-rating in large cap LPVs such as PCT and KPG, (2) greater DPS growth, and/or (3) investors to lower their return hurdles. Given the more cyclical underlying exposures of office and retail, and the uncertain economic outlook, we believe (1) and (2) are unlikely near-term, however, (3) may occur given the lack of yield on offer across the broader market and recent volatility in other yielding sectors such as electricity. We see the greatest opportunity in LPVs with defensive asset bases that still trade at a premium to their respective historical yields spreads, namely IPL and VHP.</p>
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<h3>LPVs&nbsp;the market darling in July</h3>
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<p>The S&amp;P/NZX All Real Estate Gross index returned +7.5% in July, outpacing the broader S&amp;P/NZX 50G market by 5.0% over the month. This makes up some lost ground after underperforming by -5.4% in June. Perception of the sector is improving, which we view as a result of (1) unexpected shocks to other yielding stocks (gentailers), (2) better than expected outcomes related to rental abatements, general economic activity, and property transaction pricing (which may partially reverse recent downward revaluations), and (3) the reality of ultra low interest rates setting in.&nbsp;</p>
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<div><strong>Rohan Koreman-Smit CFA</strong></div>
<div><a href="mailto:rohan.koreman-smit@forsythbarr.co.nz" target="_blank" rel="noopener">rohan.koreman-smit@<wbr>forsythbarr.co.nz</a></div>
<div>+64 9 368 0085</div>
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<div><strong>Ashton Olds</strong></div>
<div><a href="mailto:ashton.olds@forsythbarr.co.nz" target="_blank" rel="noopener">ashton.olds@forsythbarr.co.nz</a></div>
<div>+64 9 368 0127</div>
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Real Estate Reflections
TINA Gets on the Property Ladder

The listed property vehicle (LPV) sector led the wider market in July, up +7.1% versus the S&amp;P/NZX 50G up +2.4%. Changes in interest rates have been a key driver of LPV performance over the last 10 years and with (1) LPV dividends reaffirmed over May/June, (2) economic conditions 'normalising' post lockdown, and (3) volatility in other yield sectors, we believe LPV yield remains relatively attractive. In this note we highlight what current yield spreads tell us about certain LPVs, and where we see value on a relative basis. Looking ahead, there are three LPVs reporting this month, which will provide us with a read on sector confidence and expectations. We continue to favour Investore (IPL) and Vital Healthcare Property (VHP) for their defensive attributes, and Stride (SPG) for the leverage in its asset management platform.



The story behind the yield spread


LPVs gross yield spread to bonds at a sector level has remained relatively stable over the last 10 years, averaging +410bp. However, on a stock by stock basis the story has been very different. Retail yield spreads have widened as structural headwinds set in (KPG's spread has increased +310bp to 6.6% since 2017) while industrial spreads have tightened as the sub-sector gained investor popularity (GMT's spread has broadly halved to 2.7%). Looking ahead, for sector spreads to compress further we believe we would need to see (1) a re-rating in large cap LPVs such as PCT and KPG, (2) greater DPS growth, and/or (3) investors to lower their return hurdles. Given the more cyclical underlying exposures of office and retail, and the uncertain economic outlook, we believe (1) and (2) are unlikely near-term, however, (3) may occur given the lack of yield on offer across the broader market and recent volatility in other yielding sectors such as electricity. We see the greatest opportunity in LPVs with defensive asset bases that still trade at a premium to their respective historical yields spreads, namely IPL and VHP.


LPVs&nbsp;the market darling in July


The S&amp;P/NZX All Real Estate Gross index returned +7.5% in July, outpacing the broader S&amp;P/NZX 50G market by 5.0% over the month. This makes up some lost ground after underperforming by -5.4% in June. Perception of the sector is improving, which we view as a result of (1) unexpected shocks to other yielding stocks (gentailers), (2) better than expected outcomes related to rental abatements, general economic activity, and property transaction pricing (which may partially reverse recent downward revaluations), and (3) the reality of ultra low interest rates setting in.&nbsp;



Rohan Koreman-Smit CFA
rohan.koreman-smit@forsythbarr.co.nz
+64 9 368 0085





Ashton Olds
ashton.olds@forsythbarr.co.nz
+64 9 368 0127



Real Estate Reflections: TINA Gets on the Property Ladder

Investore Property

Real Estate Reflections: TINA Gets on the Property Ladder